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Move Away From Stocks as I Get Set to Retire?

Dear Dr. Don, I have around 70% of my retirement money in stocks, or about $1.1 million. I am in the hole on 70% of my picks. My savings are earning an average yield of about 2.75%. Should I take my losses and put more into my savings? I will soon turn 62, and I've been thinking about the R-word.

Have you ever thought you should stop blaming the stock market and start blaming your stock-picking skills? Active investors try to beat the market by trading, versus investing in, stocks. The pros have a hard enough time trying to time the market. There's not much hope for retail investors to do better.

If you can't beat the market, you can always "be the market" by investing in broadly based stock indexes such as the Wilshire 5000, the Russell 2000 and the Standard & Poor's 500, among others. These indexes are U.S.-centric, and you'd want to consider also having some of your stock exposure in foreign markets -- both developed and emerging.

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Stocks had a lost decade from 2000 to 2009, with returns about flat as measured by the S&P 500 stock index. Now that that's over, the 10-year annualized return of the S&P 500 through mid-July 2012 is 6.85%, and the 15-year annualized return is 4.23%. These yields assume that cash dividends paid by the stocks in the index are reinvested in the index.

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You don't say whether your stock portfolio is invested in tax-advantaged retirement accounts or in a taxable account. That matters, in terms of managing the tax impact of selling out of your stock positions to reinvest in other investments. Work with your tax professional as needed to manage this tax impact.

I've no idea whether stocks returns will beat the 2.75% you're earning on your savings as you approach retirement. Stocks should do better than that, because investors expect to be compensated for the risk they take on when investing in stocks. But the risk is real. If the stock market offered a guaranteed 6.85% return, you wouldn't see anyone investing in CDs insured by the Federal Deposit Insurance Corp.

The probability of your savings keeping its purchasing power over time after taxes and inflation is pretty remote. Rebalancing by shifting more than $1 million in retirement investments from stocks into short-term savings vehicles will preserve your principal but not your purchasing power.

You should work with a fee-only financial planner to discuss your retirement income needs and to determine an asset allocation that will increase the probability that you can meet those needs. You should also discuss with the planner the different options you have on when to receive Social Security benefits.

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